Comments on ECJ C-622/23: Unilateral termination? Watch out for VAT pitfalls!

CJEU Ruling on VAT Treatment of Termination Payments: On November 28, 2024, the Court of Justice of the European Union (CJEU) clarified that payments made by a client after the unilateral termination of a construction contract are subject to VAT, even if the contractor was willing to complete the work and the termination was beyond their control. The Court ruled that such payments are considered remuneration for services provided, not compensation for damages.
Key Principles Established: The judgment established that the mere right to use a service qualifies as a taxable transaction, a direct link exists between the service and the payment, and commenced work is decisive in maintaining this link. The ruling emphasized the economic and commercial reality of the situation, referencing previous case law to support the decision that such payments reflect contractual compensation for services rendered.
Implications for Business Practices: This decision highlights the importance of understanding VAT implications on termination fees within service contracts. Businesses, especially those in construction, should review the VAT treatment of their termination fees and consider the CJEU’s emphasis on economic reality and direct service-payment links. In some jurisdictions, like Belgium, where certain termination compensations are not subject to VAT, businesses should re-evaluate their practices in light of this ruling and ensure compliance with evolving interpretations.